Income tax fundamentals: rates, bands, and allowances

Four structural rules sit underneath every income tax calculation, and most exam traps come from forgetting one of them. First, income is taxed in a fixed order: non-savings income, then savings income, then dividend income — never the other way round, and never chosen for tax efficiency. Second, the personal savings allowance and dividend allowance are 0% RATE bands, not exemptions: income inside them still counts as taxable income and still uses up basic/higher-rate band capacity. Third, the savings starting rate band sits below the basic-rate band and is only available to the extent non-savings income hasn't already filled it — a client with enough salary or pension income can lose it entirely. Fourth, the personal allowance taper doesn't just shrink the tax-free amount: because each extra pound in the taper zone is taxed AND withdraws allowance, the effective marginal rate in that zone is higher than the headline higher rate. And for Scottish taxpayers specifically: only non-savings income uses the Scottish bands — savings and dividend income always use the UK-wide bands and rates, regardless of residence.